Line of Credit vs. Credit Card: Which Is Right for Me?
- Lines of credit and credit cards allow you to borrow money again and again until you hit your credit limit. You’ll make monthly payments and only pay interest on what you borrow.
- Credit cards are more common and user-friendly. You can even use them to earn rewards.
- Lines of credit often come with lower rates, but they’re not as practical for everyday purchases.
How do lines of credit and credit cards work?
Lines of credit and credit cards are forms of revolving debt. They let you borrow over and over again as long as you have credit available.
When you apply for a line of credit or credit card, the lender will evaluate your creditworthiness by reviewing your credit score, annual income and other credit-related factors. Creditworthy borrowers are more likely to qualify, receive lower rates and get higher credit limits.
The charges you make are deducted from your credit limit, or the amount you can charge at any given point. This leaves you with your available credit (the amount of credit you have left to spend). When you pay down your outstanding balance, your available credit goes back up, allowing you to borrow again.
Here are some key differences between credit cards and lines of credit:
Credit cards often…
- Are easier to qualify for
- Let you tap or swipe for everyday purchases
- Have higher interest rates
- Have lower credit limits (you can borrow less at a time)
- Come with fees for taking out cash (called a cash advance fee)
Lines of credit often…
- Have lower interest rates
- Have higher credit limits (you can borrow more at a time)
- Have stricter eligibility requirements
- Charge a fee every time you use them
- Only let you take out money by transferring it electronically to your bank account, writing yourself a check or visiting an ATM
What is a line of credit?
A line of credit is a type of funding that allows you to borrow by transferring money to your bank account, writing yourself a check or using an ATM. Some lines of credit, like home equity lines of credit, require collateral. Others, like personal lines of credit, are unsecured.
Lines of credit come with two phases — a draw period and a repayment period. Here’s the difference between the two:
- Draw period: Your draw period is the length of time that you can use your line of credit. The lender will also likely require you to make minimum monthly payments on what you borrow.
- Repayment period: You can no longer use your line of credit during your repayment period. Instead, this is when you’ll pay your outstanding balance (usually in monthly installments, but sometimes as a lump sum).
The length of your draw and repayment periods vary, but they are typically at least a few years each.
Interest on a line of credit also works differently than on a credit card. Credit cards typically don’t charge interest during your grace period, which is the time (usually 21+ days) from when your billing cycle ends to when your payment is due. On a personal line of credit, interest begins to accrue immediately.
Many banks require at least good credit (a FICO Score of 670+) to qualify for a line of credit. And if your bank or credit union doesn’t offer a personal line of credit, you’ll probably need to join one that does. Lines of credit aren’t typically available from online lenders.
Line of credit pros and cons
Pros
- Lower interest rates. APRs are usually lower on a personal line of credit versus a credit card.
- More funding. Credit limits tend to be higher on lines of credit.
-
Cheaper to access cash. Many lines of credit don’t have a cash advance fee.
Cons
- Strict eligibility requirements. You’ll need good to excellent credit to qualify.
- Possible transaction fees. Some lines of credit charge you each time you borrow.
- No grace period. Interest starts accruing from the moment you charge.
- Few (if any) member benefits. You don’t earn miles or cash back rewards by using a line of credit.
When does it make sense to use a line of credit?
A line of credit can make sense if you have excellent credit and need funds for large, ongoing, and/or infrequent expenses.
A line of credit is flexible. Unlike with a loan, you don’t have to know exactly how much money you need. And unlike a credit card, it can provide easy access to cash. As such, a line of credit could be ideal for open-ended expenses such as home improvement or medical bills.
Beware, though: Some personal lines of credit come with a transaction fee, or an extra charge for using your credit. If you think you’ll need to borrow often, consider choosing a credit card or taking out a personal loan.
What is a credit card?
Credit cards allow you to purchase goods and services by using a card in-store or online. Each purchase ties up some of your credit, and each repayment frees up more that you can borrow (up to your credit limit).
While this sounds a lot like a line of credit, credit cards do have distinct differences. For one, you don’t have to pay interest as long as you pay your balance in full by each due date.
Also, credit cards often come with membership benefits that lines of credit do not. You can earn miles, points or cash-back rewards with every dollar you spend. Many credit cards also offer rental car insurance at no additional charge.
Credit cards are easier to find — and qualify for — than lines of credit. Of course, borrowers with good credit scores will get lower APRs. Still, you could qualify for an unsecured card with fair credit.
But even if you’re the most qualified borrower, your APR will probably be higher on a credit card versus a personal line of credit.
Finally, you won’t be restricted to a draw period when using a credit card. As long as your account is open and you have the credit available, you can continue to charge.
Credit card pros and cons
Pros
- Lower eligibility requirements. You can qualify with less than good to excellent credit.
- Accessible. It’s easy to prequalify for a credit card online.
- Grace period. Interest doesn’t begin accruing until the billing cycle following your charge.
- Member benefits. You can earn miles or cash back rewards.
Cons
- Higher interest rates. APRs are typically higher on a credit card versus a line of credit.
- Less funding. Credit cards usually have lower credit limits than lines of credit.
- Cash advance fees. If you want to tap your credit card for cash, prepare to pay a fee.
When does it make sense to use a credit card?
A credit card can make sense if you have at least fair credit and want to earn points for everyday purchases.
By using the right cards, you can rack up credit card points to use on travel, retail purchases or cash back. And since credit cards don’t come with transaction fees (foreign transaction fees notwithstanding), they’re good for repeat buys such as gas and groceries.
Using your credit card to access cash, however, can be expensive. Most credit cards carry a hefty cash advance fee if you use your credit card at an ATM or bank to withdraw cash. Cash advance APRs are also often higher than your base APR.
Line of credit vs. credit card: Which is better for your credit score?
Lines of credit and credit cards have a similar effect on your credit score. Making on-time payments can boost your score over time, while missing payments will hurt it. Taking on too much debt with either will increase your credit utilization, which can cause your credit score to dip.
Line of credit vs. credit card rates
Average credit card rates tend to hover around 24%, according to a LendingTree study tracking rates over time. Personal line of credit rates start at around 9%.
Personal line of credit rates may be lower, but remember that you can use a credit card interest-free as long as you make payments before the due date. PLOCs often start accruing interest as soon as you use them.
What if I don’t qualify for a line of credit or a credit card?
Unless you have a strong borrowing history, don’t bank on getting a personal line of credit. If you have bad (or no) credit, credit card issuers may turn you down, too. Don’t worry — you may have other options. Some of these alternatives may even help you improve your credit.
Personal loan
A personal loan can make sense if you need money fast.
A personal loan provides a lump sum of money that you’ll pay back in monthly installments (plus interest).
If you have good credit, personal loans can come with lower APRs than credit cards. However, less-than-perfect credit doesn’t mean you’re automatically ineligible — some lenders specialize in bad credit loans.
Credit-builder loan
A credit-builder loan can make sense if you’re building credit from scratch, don’t need funds immediately and can pay a deposit.
To get a credit-builder loan, you’ll first give the lender a deposit. The lender then places your deposit in a locked savings account. To get it back, you’ll make monthly payments totalling the amount of your deposit (plus interest, in most cases).
Making on-time payments helps prove to future lenders that you can borrow responsibly. And since the lender requires a deposit, it’s more likely to approve you if you have a rocky credit history.
Secured credit card
A secured credit card can make sense if you’re seeking to improve your credit and can pay a deposit.
Like a credit-builder loan, a secured credit card requires a deposit. Unlike a credit-builder loan, you can start borrowing immediately. Your deposit will set your spending limit, and if you don’t pay back what you borrow, you won’t get your deposit back. If you use your secured credit card responsibly, you could build up your credit and eventually graduate to an unsecured card.
Get personal loan offers from up to 5 lenders in minutes